U.S. Income taxes Requirement to file tax return – 2011Single: <65 ……gross income = $9,500Single: 65+……. =$10,950MFJ: <65 (both spouses) =$19,000MFJ: 65+ (one spouse) =$20,150MFJ: 65+ (both spouses) =$21,300MFS: any age …………. =$3,700HH: <65 ……………. =$12,200HH: 65+……………. =$13,650Self-employment income… >$400
U.S. Income taxesStandard Deduction:Married Filing Joint = $11,600Head of Household = $8,500Single and Married Filing separate = $5,800Personal exemption:$3,700 per exemption / dependent
U.S. Income taxesSpecial rules for U.S. Citizens living in Israel:• Foreign Earned Income Exclusion: Exclude up to $92,900 foreign earned income Each spouse has separate exclusion• Tax treaty benefits: US Social Security benefits exempt from both US and Israeli tax U.S. pensions taxed in Israel first; claim foreign tax credit on U.S. income tax return U.S. capital gains taxed in Israel first; claim foreign tax credit on U.S. income tax return
U.S. Income taxesSelf-employed individuals Can deduct 100% health insurance costs (AGI) For 2011, SECA reduced from 14.1% to 12.28% up to $106,800 net SE income. 2.9% medicare tax on SE income > $106,800 From 2013: +0.9% hospital insurance (HI) on wages and SE net income > $250,000 – MFJ $125,000 – MFS $200,000 – everyone else.Consider incorporating to save SECA
U.S. Income taxesIncome tax rates:Lower rates 2011-2012For 2011-2012: 10%, 15%, 25%, 28%, 33%, and 35%For net L-T capital gains and qualified dividends: 15%Non-corporate taxpayer: 0% tax (if subject to 15% tax) to the extent would be taxed at 10% or 15%.Example: MFJ, both spouses <65 up to $88,000 MFJ, both spouses > 65 up to $90,300From 2013Assume rates will increasePre-Bush rates: 15%, 28%, 31%, 36% and 39.6%
U.S. Income taxesSales of SecuritiesNew Reporting Requirements:Cost Basis Reporting by Broker to the IRS•For stock bought after Jan 1, 2011•For mutual funds bought after Jan 1, 2012•For options and other securities bought after Jan 1, 2013Previously only reported Proceeds of sales.
U.S. Income taxesSales of SecuritiesNew Reporting Requirements 2011 tax return:Capital Gain Reporting by tax payer – New form 8949• A – Both proceeds and cost basis reported to IRS• B – Proceeds reported to IRS; cost basis not reported• C – Neither proceeds nor cost basis reported to IRSShort-term and long-term reported separately for each category
U.S. Income taxesAMT (Alternative Minimum Tax) for 2011The AMT exemption levels for 2011 are as follows:Married Filing Joint = $74,450, [25% phaseout for AGIexceeding $150,000]Single = $48,450, [25% phaseout for AGI exceeding$112,500]Head of Household = $48,450, [25% phaseout for AGIexceeding $112,500]Married Filing Separate = $37,225, [25% phaseout for AGIexceeding $75,000]
U.S. Income taxesAMT calculation for 2011•26% flat rate on first $175,000 AMT income ($87,500-MFS)•28% flat rate on excess AMT income•15% long-term capital gains rate applies to AMT capital gains•Foreign tax credit allowed•AMT only applies if exceeds regular income tax: Income tax on line 44 Less: foreign tax credit (no other credits)
U.S. Income taxesDonated IRAs – in 2011•Individuals = 70.5 +•Up to $100,000•Qualified public charity•Direct transfer from IRA to charity•Qualifies as RMD (if RMD < $100,000)•Only standard IRAs and Roth IRAs(?) qualify•No charitable deduction•IRA distribution not included in taxable incomePossibly extension for 2012…stay tuned.
U.S. Income taxesSurtax on unearned income Beginning 2013 Imposed on individuals, estates and trusts Medicare contribution tax = 3.8% For individual: computed on the lesser of: (1) net investment income or (2) excess of MAGI over threshold: $250,000 – MFJ or surviving spouse $125,000 – MJS $200,000 – everyone else. Sale of real estate – possibly affected
U.S Income taxes Keren Hishtalmut Taxable when eligible to withdraw from fund, after six years under constructive receipt Employee contributions (25%) not taxable
U.S. Income taxes PFICS Holders of foreign mutual funds ((קרן נאמנות Certain corporate shareholders required Must file annual report with IRS (previously required 8621) 50% of Assets = Passive 75% of Gross Income = Passive Taxed at highest tax rate: today = 36%
U.S. Income taxes Child’s tax creditReduces tax liabilityMaximum $1,000 per qualifying childReduced $50 for each $1,000 of MAGI over: $110,000- Married Filing Jointly $75,000- Single $75,000 – Head of household $55,000- Married Filing SeparateCredit cannot exceed: Regular tax + AMT Less certain credits
U.S. Income taxes Additional child’s tax creditRefundable creditGreater of: (1) 15% of taxable income >$3,000, or (2) excess of SECA > earned income credit, if have 3 or more qualifying children. Less: the child’s tax credit used to reduce tax.
U.S. Income taxesQualifying childQualifies as a dependentUnder the age of 17 years old at years endU.S. citizen or resident alienMust include on tax return the child’s name and SS#Qualifying relative Specified relative (e.g., grandchild) Gross income < exemption amount ($3,650-2010) Taxpayer provides > 50% support Is not qualifying child of another Exception: Parents are not required to file a return and does not file a return; or files on to claim tax refund.
U.S. Income taxes Phase outs and limitations postponed until 2013• Itemized deduction limitation• Personal exemption phase out• Standard deduction marriage penalty
U.S. ESTATE /GIFT TAXES– 2011 & 2012 Exemption $5 million per person ($5,120,000 in 2012) Lifetime aggregate – gift and estate tax GST is the same Portable to surviving spouse: unused portion of last deceased spouse (multiple marriages) Irrevocable election on estate tax return Not GST exemption
U.S. ESTATE/GIFT TAXES– 2011 & 2012Federal estate & gift tax rate: 35% Stepped-up basis: beneficiaries receive property with stepped-up basis to date of death values.
U.S. Gift TaxesAnnual gift tax exclusion - 2011: $13,000 per donee $136,000 to NRA spouseAnnual gift tax exclusion – 2012:$13,000 per donee $139,000 to NRA spouse Additional gift tax exemptions: Direct tuition and medical payments
U.S. ESTATE / GIFT TAXES –2013 $1 million estate tax exclusion and gift tax exemption 55% estate and gift tax rate
Information Reports TD F 90-22.1 Foreign Bank Account Report - FBARs 3520 Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts 3520-A Information Return of Foreign Trust with a US Owner 5471 Information Return of US Persons with Respect to Certain Foreign Corporations 5472 Information Return of a 25% Foreign-Owned US Corporation or a Foreign Corporation Engaged in a US Trade or Business 926 Return by a US Transferor of Property to a Foreign Corporation 8865 Return of US Persons with Respect to Certain Foreign Partnerships 8938 Statement of Specified Foreign Financial Assets [new 2011]
Foreign Financial AssetsForeign Bank Account Report – FBAR Accounts > $10,000 on any given day in tax year Aggregate of accounts = include all accounts Financial interest • includes if own foreign company Signature authority • volunteer for non-profit organization • controller for company Penalty $10,000 for not filing each year Penalty of $100,000 or 50% of account balance for each year if willful failure to file U.S. person must file
Foreign Financial AssetsForeign Bank Account Report – FBAR bank accounts brokerage accounts mutual funds unit trust accounts maintained with a financial institution or other person engaged in the business of a financial institution Commingled fund and hold equity interest Keren Hishtalmut Kupot Gemel Bituach Minhalim
Foreign Financial AssetsForeign Bank Account Report – FBARU.S. PERSON: Citizen or resident of U.S. Domestic partnership Domestic corporation Domestic trust or estate Persons in and doing business in U.S.
Foreign Financial AssetsHIRE Act • For years beginning after 18 Mar 2010 • U.S. individual • “specified foreign financial assets” • Aggregate value > specified amount • Report on tax return
Foreign Financial AssetsHIRE ActFiling threshold Form 8938If living in the U.S. - >$50,000If living overseas – joint return - >$400,000 on 31 Dec or > $600,000 at any time during the tax year other than joint - >$200,000 on 31 Dec or > $400,000 at any time during the tax year
Foreign Financial AssetsHIRE Act“Specified Foreign Financial Assets”: • Any financial account maintained in a “foreign financial institution” • Any stock or security issued by non-U.S. person • Any interest in foreign entity • Any financial instrument or contract held for investment and issued by non-U.S. person
Foreign Financial AssetsFATCAStarting in 2013 foreign banks have to enter into anagreement with the IRS.Banks will be required to determine which of their accountholders are U.S. persons - due diligence.Information on U.S. persons’ bank account activity will bereported to the IRS starting from tax year 2014.
Foreign Financial AssetsFATCA 30% withholding tax at source for account holders whorefuse to divulge if they are U.S. persons30% withholding tax at source for all account holders atbanks that refuse to comply with FATCA.Israeli banks have agreed to comply with FATCA. Withholding applies to U.S. source income “U.S. account” = any financial account held by “specified U.S. person” or U.S. owned foreign entity
Foreign Financial Assets FATCA - Proposed Regulations• In 2014 (for the 2013 calendar year), only the name, address, TIN, account number and account balance must be reported.• Required reporting on income beginning in 2016 (for the 2015 calendar year)• Required reporting on gross proceeds beginning in 2017 (for the 2016 calendar year).• Withholding will not be required on foreign pass thru payments until January 1, 2017;• Participating FFIs will be required to annually report the aggregate amount of certain payments to each nonparticipating FFI.
Foreign Financial Assets FATCA - Proposed Regulations• Increased reliance on existing customer intake and KYC/ AML procedures, particularly with respect to new accounts.• Preexisting individual accounts with a balance or value of US$50,000 or less (US$250,000 for certain cash value insurance or annuity contracts) and preexisting entity accounts with a balance or value of US$250,000 or less are exempt from review.• Accounts with a balance or value in excess of these amounts but less than US$1 million will be subject only to review of electronically searchable records (i.e., information that can be accessed using a database search).
Foreign Financial Assets FATCA - Proposed Regulations• Manual review of paper records (limited only to certain categories of paper records) will only be required where the account balance exceeds US$1 million – an increase from the previous US$500,000 threshold.• If “enhanced review” beyond a review of electronically searchable records is required because the account value exceeds US$1 million, inquiry as to a relationship manager’s actual knowledge of indicia of US ownership will be required, and FFIs will need to implement appropriate policies and procedures to ensure compliance with the requirement.• Verification of compliance through third-party audits will not be mandated, and FFIs may generally rely on periodic internal reviews rather than external audits.